Farmers continue to struggle

Third Quarter 1999 Agricultural Credit Conditons Survey

"Commodity prices are the biggest problem facing our customers,"
commented a North Dakota banker in the Minneapolis Fed's third quarter
(August 1999) survey of agricultural credit conditions. "Most of
our farm and ranch customers are suffering economic havoc because
of high living and operating expenses and low commodity prices,"
reported a South Dakota lender. These comments are indicative of
the problems most district farmers face.

The results from the third quarter survey reveal a further deterioration
of the farmers' financial condition compared to the dismal results
of the second quarter survey. Farm income and capital spending continue
to slide. Moreover, loan renewals or extensions remain above normal
levels, and the percentage of farm borrowers up to their loan limit
has increased. In addition, lenders are requiring more collateral
for their farm customers and loan repayments have slowed, while
interest rates increased slightly. The forecast for farm income
is desperate. "A number of the smaller farmers and possibly a number
of the larger farmers too are talking of liquidation," wrote a Minnesota
banker.

Farm income and spending

"The price of wheat, even with a good crop, is at or below break-even,"
stated a Montana lender. Farm income continues to crumble, with
86 percent of bankers reporting below normal levels, a slight increase
over second quarter survey results. Capital spending is almost nonexistent,
with essentially all bankers reporting below normal levels, a 4
percentage point increase over second quarter survey results. Farm
household spending is drastically reduced, with 59 percent of lenders
noting below normal levels in the third quarter, a 5 percentage
point increase over the second quarter survey. Montana and North
Dakota farmers are having the harshest problems: 100 percent and
95 percent of lenders, respectively, report below normal farm income.

Farm loan volumes

As farmers reduce capital and household spending, requests for
loans decrease. Operating loan volume, except for feeder loans,
decreased as 14 percent of bankers report loans at below usual levels
in the third quarter, a slight increase from the second quarter.
In addition, real estate loans decreased as 55 percent of bankers
reported lower than normal levels of real estate loans in the third
quarter, a 17 point increase from the second quarter. Moreover,
machinery loans continue to slide, with three-quarters of bankers
reporting below normal loan volumes in the third quarter, a 16 point
increase from the second quarter.

Bank credit conditions and liquidity

Although farmers are not taking on new loans, they are having a
tough time repaying existing loans. Below normal levels of loan
repayments are reported by 59 percent of lenders in the third quarter,
a slight increase from the second quarter, while above normal renewals
and extensions are reported by half of respondents, a slight decrease
from the second quarter. Moreover, the districtwide average of farmers
at their debt limit is 38 percent for the third quarter, a 7 point
increase from the second quarter survey; Montana is still substantially
higher at 49 percent in the third quarter, a 6 point increase from
the second quarter.

Higher than normal levels of collateral required for loans are
reported by 38 percent of respondents, a slight increase from the
second quarter. Availability of funds is not a problem as almost
all banks report normal or above normal levels of loanable funds
in the third quarter.

Interest rates and land prices

Farmers are facing a slightly higher level of interest rates compared
to last quarter, which are still near their lowest level in more
than four years.

Wisconsin, Montana and North and South Dakota lenders report land
prices up on average from 1 percent to 15 percent. Minnesota lenders,
however, report cropland prices down from a year ago about 2 percent.

Outlook

"The farm situation is very glum and there is much despair among
our farm customers," said a Minnesota lender. The next three months
don't look much brighter, with 89 percent of lenders expecting farmers
to have below average net income. In addition, 92 percent of lenders
expect below-normal capital spending levels in the next three months,
and three-quarters of lenders predict that the rate of loan repayments
will be below normal in the next three months.

Fixed Interest Rates *

Feeder Livestock

Operating

Machinery

Real Estate

3rd Q '98

9.6

9.8

9.7

8.9

4th Q '98

9.5

9.6

9.4

8.7

1st Q '99

9.4

9.5

9.3

8.6

2nd Q '99

9.4

9.4

9.3

8.7

3rd Q '99

9.4

9.5

9.3

8.7

* Average of reported rates in mid-August 1999

Each quarter, the Federal Reserve
Bank of Minneapolis surveys agricultural bankers in the Ninth
Federal Reserve District, which includes Montana, North Dakota,
South Dakota, Minnesota, northwestern Wisconsin and the Upper
Peninsula of Michigan. In August, 103 bankers responded regarding
conditions during the third quarter.